Paul Graham, an Anglo-American entrepreneur and investor best known for co-founding the most effective accelerator and startup investment company called Y Combinator, recently wrote a comparative article between the rich Americans listed in Forbes magazine and how to get rich. Done in 1982 and 2021.
I have tried to translate this article into several parts so that we can benefit from the interesting content mentioned in this article.
Since 1982, Forbes Magazine has published an annual list of the richest Americans. If we compare the 100 rich people of 1982 with the 100 rich people of 2020, we notice big differences.
According to studies, in 1982 the most common source of wealth was inheritance. Of the 100 richest people in America, 60 entered the list because of the huge amount of money they inherited from their ancestors.
But over time, the list changed dramatically, with the number of people who entered the rich list for inheritance halving by 2020, with only 27 of the 100 heirs.
The change has prompted researchers to be interested in finding the reason behind the decline, despite a reduction in inheritance tax.
The result of the research was that people are building such wealth instead of inheriting great wealth! So the question is, how do these people build these new fortunes?
Research shows that approximately 75% of the top 100 rich people in 2020 made their fortunes by starting their own companies and businesses, and the remaining 25% made their fortunes through investing.
If we look at the list published in Forbes 2020, we see that only 27 people were added to this list through their inheritance, and out of the remaining 73 rich people, 56 were shareholders or initial employees (52 founders, 2 first employees, and 2 founding spouses).
Companies also form 17 fund managers. Among the 100 richest Americans in 1982, there was no sign of an investment fund manager. Although venture capital funds and private equity firms existed in 1982, the founders of these funds were still not wealthy enough to be on the top 100.
But there are two reasons why they are now on the list: The first is that managers over time learn what methods to use to increase the efficiency of their funds, and the second is that as a result of improving their performance, more investors trust them and give them the management of their money.
People indeed learn over time to make money by investing, but it seems that now the main source of new wealth is starting a business!
When we look at the data, we see that the people who have started a company in recent decades are far more successful and wealthy than those who participated in 1982! Why?
Because new companies have different fields of activity and mechanisms. In fact, in 1982, there were two dominant sources of wealth: oil and real estate.
Of the 40 wealthy who became wealthy through non-inheritance, at least 24 had amassed this wealth through oil or real estate activities. But in the 2020 list, the number of these people has been reduced to 6!
In 2020, the biggest source of wealth will be companies operating in the field of “technology”. So that 8 of the first 10 people filled the list of the richest people!
Of course, treating technology as a single category is somewhat misleading. Isn’t Amazon an online store and Tesla a carmaker? The answer to this question can be either yes or no, but in the next 50 years, when what we know today as technology becomes a matter of course, it may not seem right to put these two businesses in a single category.
But at least for now, there is definitely something in common that distinguishes the two companies from the retail and automotive industries.
Which retailer do you know that has launched the AWS service (or Amazon Web Service, a great tool for deploying various applications in the cloud)?
Or which car company is run by someone who also owns a missile company? Perhaps asking these first questions will make this distinction clearer!
People who only consider the Gini coefficient (the economic index of calculating the distribution of wealth among the people) refer to 1982 as the good old days! Because those who at that time became rich only by inheriting, extracting natural resources, and trading real estate, these days can not be as successful as before.
But considering how the rich people of that period got rich, the past does not look very good. In 1982, 84% of the 100 wealthy people became rich through inheritance, natural resource extraction, or real estate transactions.
Is the era in which 84% of the top rich made money just by inheriting or eventually trading in oil and real estate really better than the era in which the richest people reach this position by starting technology companies?
Examining the historical documents, we come across an interesting topic. In 1892, the New York Herald Tribune (New York Times Today) compiled a list of all 4,447 American millionaires.
How many of them do you think had inherited their wealth?
Only 20%! Even less than the statistics published in 2020… And the interesting thing is that by conducting research, we find that most of the rich in 1892, similar to the rich in 2020, reached their position through the establishment of the company and the use of emerging technologies at that time!
So 2020 is not that different! Rather, 1982 is an anomaly. With these interpretations, the question that arises is what happened in 1982? Following the events of that time, we realize that the American economy was involved in a wave of integration!
In the late 19th and early 20th centuries, financiers like JP Morgan merged thousands of small companies into hundreds of leading giant companies. At the end of World War II, Michael Lind wrote somewhere:
“Major sections of the economy either included government-organized cartels or were dominated by several large oligopolistic corporations.”
This move made starting a start-up business in those years not a viable option for gaining wealth.
In this way, most people turn to employee life. Although this reduces economic inequality (and any other form of inequality), it is not a model that will bring people to a higher economic position in the long run.
Especially when we see the economic dominance of GP. Morgan was only in that transient phase and began to disintegrate in the 1970s.
What do you think caused the collapse of this giant? The answer is old! Isn’t it weird? In fact, these large companies, whose performance model in the 1930s seemed scalable and efficient, lost their grandeur over time, so much so that in the 1970s they were completely weak from the inside out and bloated from the outside.
The only major reason for their persistence was the strong economic structure of the time. But when Carter came to power, the federal government began to pursue anti-oligopoly policies in a process known as “deregulation.”
But it was not just because of internal decay that JP Morgan’s economy collapsed.
In addition to internal problems, the development of new technologies, especially microelectronics, is putting pressure on the structure of the collection.
To get a clear picture of what happened, the best example is the idea of a pond with a thin crust of ice on top of it that shatters first from the corner and then from the middle as the pressure continues.
In those years, companies that introduced themselves as e-commerce developers or software companies were the first creators of the Turks, but from the corner of the pond. If now startups are ruthlessly breaking the ice in the middle, they are offering a new definition of how the retail industry, TV networks, and car companies are operating.
The economic collapse of JP Morgan was indeed the beginning of a new world in terms of technology, but socially it was a return to normalcy.
If we look only at the middle of the 20th century, it seems that getting rich by starting their own business is a new phenomenon.
If we look to the distant past, we realize that this was the case from the beginning and is not a new event.
The only thing that is different from that time is that starting a business and startup has become much easier in recent decades. One of the reasons for starting a startup in today’s world is the community.
It seems to be re-simulating a concept. Due to the availability of a wide range of resources, people’s knowledge in this regard has increased so that if you decide right now to quit your full-time job and start a startup, your family will not be surprised as before this decision. .But the main reason it is easier to start work now is cheaper.
We have to admit that starting a company in the past required more initial capital, but with the advent of technology, the cost of manufacturing products and attracting customers has decreased significantly.
In addition, reducing the start-up costs of a start-up company has changed the balance of power between founders and investors.
In the past, starting a start-up company meant setting up a factory, and it was not possible at all without a license from the investor.
But now it is the investors who need the founders, and this has led to an increase in the number of venture capitalists and the number of valuations they make in today’s world.
But there is a third factor: Today’s companies are inherently more valuable due to their rapid growth. Technology has not only made the manufacture and distribution of equipment cheaper but also increased its speed.
This process started a long time ago and continues. IBM was founded in 1896 and took 45 years to reach $ 1 billion in 2020. It took 25 years for HP to reach that revenue and exactly 13 years for Microsoft.
If today’s startups reach it in less than 7 or 8 years.
On the other hand, these rapid growths have a double effect on the founders’ shares’ value.
Given that the value of a company is a function of revenue and growth rate, so if a company grows faster, not only will it reach $ 1 billion sooner, but it will be more valuable than other companies when it reaches that point.
One of the reasons that today’s rich people are younger than the rich people of the past is the rapid growth of their business, which leads them to make more money in less time!
With these correct interpretations, it has become easier to start and grow a company than in the past, and more people are starting their own business than in the past, but only those who can make better deals with investors are more valuable.